Housing is becoming a pipe dream for young Australians | Emilie Dye

Read the paper here.  In a comprehensive exploration of the Australian housing market, Emily Dye uncovers the stark reality of home ownership for young Australians. Homeownership has sharply declined over the past 20 years with the younger generations especially hit hard. Emily breaks down the complex terms such as 'housing affordability' and 'affordable housing', churning out an incisive analysis of the intergenerational struggle for home ownership.

When taking a closer look at the regulations presently stifling the housing market, it reveals a grim picture where tax concessions and local goverments' influence play a significant role. Emily Dye exposes how perceived views, heritage protections and desire for preservation overrule the need for more housing, leading to an unreasonably high ration of median house prices to incomes.

Dye spotlights the need for a shift in housing preference. As younger generations are drawn towards environment-friendly, high-density housing, the bureaucratic regulations continue to favor single-family sites. The zoning tax—a housing constraint resulting from bureaucratic interventions—is dissected in the publication, revealing its heavy contribution to the high home prices in major Australian cities.

While high immigration is frequently blamed for the surge in home prices, Emily argues that restrictive supply is, in fact, the culpit. She asserts that demand only becomes a problem when supply is handicapped. Dye concludes with a compelling argument for increased housing stock through strategic state interventions, arguing that this is the only path to make housing affordable for Australia’s future generations.

Episode Transcript

(00:00):
Housing is Becoming a Pipe Dream for Young Australians, by Emily Dye.
Published on February 6th, 2024.
For all references and graphs, please download the publication at the Centre
for Independent Studies website, where you can also become a member of CIS.
Housing Affordability Problem for Young People Housing affordability remains

(00:21):
one of Australia's clearest and
most frequently cited examples of intergenerational inequality. equality.
Over the past 20 years, home ownership has fallen from 70% to 66%.
And for young generations, the uphill struggle to break into the housing market
has only become steeper.
Home ownership among 25 to 29-year-olds has fallen from 43.2% to 36.1%.

(00:48):
For Gen Z, the situation is looking even more dire with the hope of owning their
own home turning into a pipe dream.
What is housing affordability?
Housing affordability refers to the ability of people with an average income to pay for a home.
It does not refer to simply the price of housing in an area,

(01:08):
which can be driven up by high incomes but still be affordable relative to those incomes.
But the term housing affordability is often confused with affordable housing,
which refers to government-subsidised housing for low-income earners.
The intergenerational struggle.
When boomers were in their prime home buying years in the early 1980s,

(01:28):
it took a little over two years to save for a 20% deposit on a median priced home.
When Gen X entered the market in the 1990s, it took just under three years.
Now for a millennial household, it takes over 5.5 years to save for a deposit.
A household earning the median income in Australia can now afford just just

(01:49):
13% of homes sold across the country.
And that percentage is likely even smaller in our major cities.
The ratio of median house prices to incomes has roughly doubled from 1989 to 2023.
In 1989, it peaked at five times the amount, but was less than four for most of the 1980s.

(02:11):
By January 2023, it was 7.9 times, having peaked at nine times during the pandemic housing boom.
So it's no surprise young people are struggling to purchase their first homes
and the largest decline in home ownership is among those aged 25 to 44.
The wage price race.

(02:33):
Investors tend to assume housing prices always go up with everyone from mum
and dad investors to superannuation funds putting a significant proportion of
their eggs in the property basket.
Unaffordable housing is not an inevitable result of capitalism.
Rather, in a functioning market, the idea that housing prices will outpace wages

(02:54):
should not be a certainty.
Why does the problem exist? The failure to allow the private market to operate
freely is the key driver of the current housing crisis in Australia.
The regulatory framework has stopped Australia from building enough housing
and the housing we are building isn't located where people want to live.
What about tax concessions? Negative gearing and capital gain discounts for

(03:17):
investors can feel like salt in the wound to young people unable to afford even a first home.
However, these tax concessions can only be credited with increasing housing prices by 1-4%.
Further, they help reduce rents for those same young people struggling to save
for that first home deposit.
The tyranny of the minority. Local governments are heavily influenced by the

(03:41):
view, or perceived views, of their constituency.
Architects demand heritage protections which turn entire neighbourhoods into
time capsules, and NIMBYs want to preserve the character of the neighbourhood
they originally bought into.
Councils believe, rightly or wrongly, that voters don't want density,
and are easily swayed by NIMBYs.

(04:03):
Further, councillors represent nearby residents, not the direct beneficiaries
of increased housing supply, the newcomers moving into the area.
Local governments will act like a cartel, restricting supply and driving up the price of housing.
That benefits local residents, but harms potential residents from outside the
area and future generations.

(04:24):
While it is clear many people are reluctant to see change in their own neighbourhoods,
those very genuine feelings cannot be allowed to outweigh the need for more housing.
What people want. What is less clear is the assumption that most people prefer
to live in single-family suburban homes with rotary clotheslines and space to
barbecue in the backyard.

(04:45):
In fact, 59% of Sydneysiders and 52% of Melbournians reported in 2011 they would
prefer to live in mid- to high-density housing.
Yet, at the time of the survey, only 38% of Sydney's and 28% of Melbourne's
housing fell into those categories.
The mid to high density supply had improved by 2,021 to 45.9% in Sydney and

(05:12):
34.4% in Melbourne, but still fails to meet the preferences of the population.
Further, the values of younger generations often trend towards higher density,
making it reasonable to expect the demand for mid to high density housing to increase over time.
For example, Gen Z and Millennials tend to be environmentally focused,

(05:34):
so are more likely to prefer walkable neighbourhoods with easy access to public
transport, as fewer own cars than previous generations.
However, zoning regulations tend to preference single-family zoning over other housing types.
We need diversity of housing across locations so everyone can find housing that

(05:54):
that matches their needs.
The bureaucratic hurdles. The process is the punishment for many developers,
delaying and outright stopping their ability to build and risking the viability of projects.
Rising interest rates and escalating construction costs can quickly transform
an initially feasible project into an unviable one.

(06:16):
Moreover, the prolonged delays can have a significant impact on a project's
eligibility for funding.
Councils and community complaints force projects to downsize or reduce the number
of affordable units in a project plan.
Exclusionary zoning practices further compound the issue, with restrictions
such as single-family-only zoning, height limitations, parking requirements,

(06:40):
minimum lot sizes and use restrictions.
Particularly problematic is zoning that exclusively permits single-family homes.
Representing a severe constraint on diverse and inclusive housing development. The zoning tax.
Zoning tax is the price you pay for the legal right to put a dwelling on a piece of land.

(07:00):
That legal permission to build on a site holds a large value as can be seen
when an area is rezoned, and the price of the land immediately increases despite
all other factors, including location and size, remaining the same.
Economists estimate average effects of the zoning tax across a city by calculating

(07:21):
the difference between the average sale price of a given dwelling and what it
costs to build, including what the developer can expect as a normal profit.
Zoning tax equals price minus construction costs and profit margins.
The zoning tax accounts for $489,000 or 42% of the price of a home in Sydney, $324,000,

(07:43):
or 41% of the price in Melbourne, $159,000, or 29% of the price in Brisbane,
and $206,000, or 35% of the price in Perth.
The question of demand. The housing affordability issue is often blamed on high demand.
More people are choosing to live alone, short-term letting is increasingly popular,

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and Australia is a high-immigration country.
However, demand only becomes a problem when supply is restricted and not allowed
to meet the increased need for housing.
Sydney needs about 30,800 extra dwellings a year to match expected population growth.
Essentially, that means a baseline growth in the dwelling stock in each local

(08:29):
government area of at least 1% a year.
This level of growth is well within the range of possibility,
but is stymied by our current regulatory environment.
How can this be achieved? State governments could help alleviate the housing
crisis by issuing general overrides for certain types of exclusions,
for example, allowing granny flats,

(08:51):
ensuring the areas around public transport is zoned for mid to high density
and setting mandatory targets for councils.
As a means of enforcement, if councils failed to approve the allocated number
of projects in the timeframe, the state could appoint a planning administrator
or automatically relax zoning restrictions.
State governments could also reward councils that beat their targets with incentive

(09:15):
payments as well as building more infrastructure. The only way Australia will
make housing affordable for future generations will be by increasing the housing stock.